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Fitch: Discovery's Ratings Unaffected by the Acquisition of Controlling Interest in Eurosport

January 23, 2014

CHICAGO --(BUSINESS WIRE)-- Discovery Communications LLC's (Discovery) 'BBB' Issuer Default Rating (IDR) is not affected by the company's agreement to acquire a controlling interest in Eurosport International ( Eurosport ) from Television Francaise 1 SA (TF1). The transaction, which is expected to close during the first half of 2014, increases Discovery's ownership interest in Eurosport to 51% from 20%. A complete list of Fitch's ratings on Discovery is provided at the end of this release. The incremental investment in Eurosport is consistent with Fitch's expectations for the rating and in line with the company's strategy to grow and improve the performance of international operations. The margins at Discovery's International Networks segment exceed 40%, materially above its peers. The consolidation of Eurosport's operating profile as well as Discovery's acquisition of SBS Nordic in 2013 is expected to pressure international segment margins in the near term before realization of modest synergies and programming rationalization strengthen margins. Cash requirement related to the investment is expected to be approximately $400 million . Fitch anticipates the funding will be neutral to the credit profile and consistent with the current ratings. Fitch believes Discovery's credit profile has sufficient flexibility, given solid free cash flow (FCF) generation, strong credit protection metrics for the ratings category, and a minimal near-term maturity schedule, to accommodate the incremental investment in Eurosport . Debt incurrence to fund share repurchase activity is incorporated into ratings up to Fitch's 3.0x leverage threshold for Discovery's 'BBB' rating. Further, while large-scale M&A activity is not anticipated given the dearth of cable network assets available for sale, Fitch believes there is room at the 'BBB' level to absorb some mid-sized acquisitions, underscored by Fitch's current belief that the company would restore leverage to under 3.0x within a 12-month timeframe. Discovery's repurchase of common and preferred stock totaled $969 million ( $256 million preferred stock repurchase was made outside of the company's authorized stock repurchase program) during the first nine months of 2013. The company had $805 million of share repurchase capacity remaining under the current $4 billion authorization. Eurosport's flagship network reached 133 million homes across 54 countries in 20 languages. The incremental investment was based on Eurosport's enterprise valuation of approximately $1.2 billion ( EUR902 million ). The transaction marks an acceleration of the original agreement terms by nearly one year whereby Discovery had the right to purchase a controlling interest in Eurosport beginning December 2014 . TF1 retains its right to put its remaining interest in Eurosport to Discovery through June 2015 . Discovery's ratings are supported by the company's strong core brands -- in particular the strength of the company's Discovery and TLC brands, both of which reach nearly 100 million subscribers across the U.S. and continue to generate solid ratings. In addition, the ratings incorporate the revenue and growth prospects of the company's international business segment, global carriage, leverageable content, robust FCF and solid credit metrics. Ratings concerns continue to center on the significant contribution of cyclical advertising revenue, a competitive landscape of similar programming on other cable channels, the general volatility associated with hit-driven content and the company's dependence on the Discovery and TLC brands. Fitch currently rates Discovery as follows: --IDR 'BBB'; --Senior unsecured bank facility 'BBB'; --Senior unsecured notes 'BBB'. Additional information is available at www.fitchratings.com . Applicable Criteria and Related Research : --'Corporate Rating Methodology' ( Aug. 5, 2013 ). Applicable Criteria and Related Research : Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS . IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.FITCHRATINGS.COM . PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Ratings Primary Analyst: David Peterson , +1-312-368-3177 Senior Director Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 or Secondary Analyst: Rolando Larrando, +1-212-908-9189 Director or Chairperson: Mike Simonton , CFA, +1-312-368-3138 Managing Director or Media Relations: Brian Bertsch , +1-212-908-0549 brian.bertsch@fitchratings.com Source: Fitch Ratings


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